Draft Dodging: Why Big Beer Is Going Flat

And What Industry Giants Are Doing to Get Their Buzz Black

When the beer industry has its annual gathering in Las Vegas this month, attendees can expect the usual educational seminars, legislative rundowns and vendors pushing everything from beer salt to delivery trucks. And if past National Beer Wholesalers Association meetings are any indicator, there'll be plenty of cheerleading about the state of suds.

The industry's biggest players, Anheuser-Busch InBev and MillerCoors, whose mega-brands have dominated America's tap handles and supermarket shelves for decades, are being battered by a new wave of competition from inside and outside the beer market and starting to lose their grip.

On one side, newly aggressive liquor brands are stealing share, especially among the coveted young-adult demographic. As a result, beer has seen its piece of the total alcohol market fall to 48.8% last year from 56% of sales in 1999, according to the Distilled Spirits Council of the U.S. On another, craft brews, once a trendy badge for beer geeks, are now mainstream options for Joe Sixpack, a development that has contributed to eight of the top 10 U.S. beer brands losing share at stores in the 52 weeks ending Aug. 11, according to IRI. It tracks convenience stores, supermarkets, drugstores, mass-market retailers and select club stores.

Among the losers are No. 1 Bud Light, whose sales fell 0.7% in the period to $5.9 billion, and No. 4 Miller Lite, down 2.5% to $1.9 billion. Though light beers began declining about five years ago, their descent has accelerated this year, noted Benj Steinman, president of trade publication Beer Marketer's Insights. "And that really matters," he said.

That's because light beers account for well over half of the volume at both A-B InBev and MillerCoors, Mr. Steinman said. Together the two brewers control nearly 97% of the light-beer market, equaling some $7.8 billion in store sales from January through mid-July, according to IRI.

The situation is grim, but not irreversible. The two big brewers still control 74% of beer-shipment volume in the U.S. by Beer Marketer's Insights' calculations. And with their massive scale and marketing machines, the companies have experienced early success with new brands meant to take on liquor and smaller craft beers. But before the beer industry can regain its buzz, it's important to understand the six-pack of hurdles it has in front of it.

LACKLUSTER ADVERTISING

When speaking with Paul Chibe, VP-U.S. marketing at A-B InBev, it's best to tiptoe around the subject of the farting horse. Part of a suite of ads for Bud Light that ran several years ago under a previous marketing regime, it's become an internal symbol at the brewer of what not to do in advertising. "It's not going to build the category," he said. The horse spot epitomized the brewer's once-sophomoric ad humor, though the period also produced memorable ads such as the Budweiser frogs.

For a category once known for some of the best TV ads, hits over the past few years have been too few. Only one beer campaign has achieved pop-culture acclaim in recent years -- Dos Equis' "Most Interesting Man in the World."

Former A-B Chief Creative Officer Bob Lachky -- who was behind A-B classic "Wassup?!" -- blames his ex-employer for overtesting. "It's almost impossible to get a breakthrough idea through a system that may be overanalyzing in the pre-test stage," he said. "Once in a while, you do have to take a chance."

Mr. Chibe counters that the new regime is taking plenty of risks; it's just using data to make smarter choices. "Everything that I am running on air is an ad that has been tested and qualified to drive purchase intent and persuasion," he said. Mr. Chibe has put a premium on music-themed marketing, signing up artists like Jay Z and Justin Timberlake, as the brewer seeks to appeal to millennials with more aspirational ads and fewer frat-boy pranks.

Big brands are also resorting to packaging as a major marketing tool. Coors Light is pushing a "double-vented wide-mouth can" that the brewer says produces a smoother pour. Miller Lite, which launched in 1975 as the first successful mainstream light beer, will be repackaged in its original can design from Jan. 1 to March 15, harkening back to its glory days as the beer that "tastes great" and is "less filling."

IS IT THE TASTE?

There's growing reason to believe that the best advertising in the world may not heal the light-beer category. Only 30% of drinkers describe such beers as "tasting great," down from 33% in June 2012, according to a recent survey by ConsumerEdge Insights' Beverage DemandTracker, a periodic survey of U.S. adults who consume alcohol at least once a week.

Consumers who once reflexively ordered beers by brand are now scanning menus organized by taste profiles and alcohol content. Consider the Yard House chain, whose website presents beer options under headers such as "malty," "dark" and "bitter." How can mainstream light beers possibly compete?

"It all boils down to positioning," said MillerCoors Chief Marketing Officer Andy England. As other beers get heavier, Coors Light -- which is marketed as "the world's most refreshing beer" -- is the perfect choice "on a hot day or following a hoppy, malty brew when you want something that is a little lighter to wash that down," Mr. England said.

Although they're declining, light beers remain a popular option. That's true even at Yard House, where Bud Light, Coors Light and Miller Lite still rank in the top seven draft-beer choices, according to Yard House data cited by MillerCoors. Still, before the craft-beer boom, big brewers pretty much had the bar to themselves.

SPLINTERING MARKET

The beer market is fragmenting like never before. While in the old days consumers might stick with their favorite light beer all night, today they "are drinking more types of beers for different occasions," switching between crafts, light beers, flavored-malt beverages and cider, said Bill Pecoriello, CEO of GuestMetrics, which tracks bar and restaurant trends.

Big brewers are responding by flooding the market with line extensions and brands that blur the line between cocktails and beer. A-B InBev this winter will add Bud Light Lime Cran-Brrr-Rita as a seasonal, adding to the lineup of margarita-inspired malt beverages that include Lime-A-Rita and Straw-Ber-Rita. MillerCoors, meanwhile, has put major marketing muscle behind its Redd's Apple Ale, recently following it up with a strawberry version. "Today's 21- to 27-year-olds grew up expecting variety," said David Kroll, MillerCoors VP-innovation.

LIQUOR IS WINNING

But as they innovate, brewers are butting heads with liquors, which have found success with flavorful varieties and dessert-inspired vodkas like Smirnoff Cinna-Sugar Twist. Beer has also lost what was once a distinct ad advantage over liquor as broadcast TV networks relax their rules to allow for more liquor commercials in late night and the last hour of prime time. Liquor brands spent $243 million on network, cable and spot TV ads in 2012, up from $145 million in 2010, according to Kantar Media. Beer's spending grew more slowly in that time, to just over $1 billion from $976 million. And it's liquor brands, not beer, spawning some of best ad characters and storylines, such as the continuing Captain Morgan campaign inspired by real-life privateer Captain Henry Morgan.

Big beer is fighting back with higher-alcohol extensions targeting nighttime drinking occasions. MillerCoors next year will launch Miller Fortune at 6.9% alcohol by volume (compared with 4.2% for most light beers), following the 2012 launch of Bud Light Platinum, which checks in at 6% and is backed by Justin Timberlake ads. Will these strategies bring the sexy back to beer? It's too soon to tell.

LOSING THE BAR BATTLE

One reason drinkers are switching to liquor is that they see it as a less expensive way to get higher alcohol content, GuestMetrics found. This could be one reason why sales trends for beer at bars and restaurants are so lousy. On-premise beer volumes fell 5.3% in the four weeks ending Aug. 11, according to GuestMetrics, which is concerning, Mr. Pecoriello said in a report, especially because of the slight improvement in underlying volume trends in spirits and wine in the same period. MillerCoors has found millennials use social media to meet up at private residences where they drink more affordably before heading to bars where they down expensive cocktails. The key for beer, Mr. England said, is to lure young adults to the bar earlier with light-beer specials.

WHAT ABOUT WOMEN?

One path to recovery is to capture more female consumers, who account for only about 20% of beer drinkers. At last year's beer wholesaler's convention, A-B InBev North American President Luiz Edmond conceded that in the past the brewer has been guilty of portraying women "in a way that they were not necessarily at the same level" as men. But that is changing as brands move away from frat-boy jokes and babes in bikinis.

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E.J. Schultz

E.J. Schultz is the Chicago Bureau Chief at Ad Age and covers beverage, automotive and sports marketing. He is a former reporter for McClatchy newspapers, including the Fresno Bee, where he covered business and state government and politics, and the Island Packet in South Carolina. He has won awards from the Society of American Business Editors and Writers, the Jesse H. Neal Awards, the Association of Capitol Reporters and Editors, the California Newspaper Publishers Association, the South Carolina Press Association and Investigative Reporters and Editors. A native of Cincinnati, Schultz has an economics degree from Xavier University and a masters in journalism from Northwestern University.